What the P/E ratio tells you
Think of P/E as the price tag on a company's profit. It compares what you pay for one share with what that share earns in a year.
Because it's a ratio, P/E lets you compare companies of very different sizes. A $20 stock and a $500 stock can have the same P/E, which means investors value each dollar of their earnings the same way.
A high P/E usually means investors expect earnings to grow quickly and are willing to pay a premium today. A low P/E can mean the stock is undervalued, or that the market expects the business to struggle.
How to calculate the P/E ratio
If a stock trades at $50 and its EPS over the last year was $5, the P/E is 50 ÷ 5 = 10. Investors are paying $10 for each $1 of earnings.
Flip the ratio and you get the earnings yield (EPS ÷ price). A P/E of 10 equals an earnings yield of 10%, which makes it easier to compare a stock with interest rates on bonds or savings.
New to EPS? Read what EPS means first.
Try it yourself
P/E calculator
Move the share price and the yearly EPS. Notice that the P/E changes when either one moves.
If profit stayed flat, it would take about 20 years of earnings to add up to today's price. That's another way to read the P/E.
Trailing vs forward P/E
The same stock can show two different P/E ratios depending on which earnings are used.
Trailing P/E
Uses actual reported EPS from the past 12 months. It's based on real results, which is why most data sites show it by default.
Forward P/E
Uses analysts' estimated EPS for the next 12 months. It reflects where profit is expected to go, but estimates can be revised or turn out wrong.
Trailing vs forward P/E
Northwind Coffee trades at $60 and earned $2.00 per share over the last 12 months. Change what analysts expect next year.
Analysts expect earnings to grow, so the forward P/E is lower than the trailing P/E. The stock looks cheaper on next year's profit.
Same P/E, different stories
A P/E on its own doesn't say whether a stock is cheap. Two companies with the same P/E can be very different deals if one is growing much faster. The PEG ratio adds growth to the picture.
Same P/E, different stories
Both companies trade at a P/E of 30. Set how fast each one's earnings grow per year and compare their PEG ratios.
Helio Grid Systems
Brightpath Health
PEG = P/E ÷ yearly earnings growth rate. A common rule of thumb treats a PEG below 1 as cheap for the growth on offer. It depends on growth forecasts, which can be wrong.
The other key comparison is with the company's own industry. Software companies and utilities have very different typical P/E ratios, so compare a stock with its peers and its own history, not with the whole market.
Is a low P/E a bargain?
Sometimes. But a low P/E can also be a value trap: a stock that looks cheap because the business is shrinking. Shrinking revenue and weak free cash flow are two common warning signs, since cash flow is harder to dress up with accounting choices than reported earnings.
Low P/E checklist
A stock has a P/E of 8. Tap any statement that's true.
No red flags so far. The low P/E could be a real opportunity worth researching further.
Common mistakes
Comparing P/E across industries
A bank with a P/E of 12 and a software company with a P/E of 40 can both be fairly priced for their industries. Compare peers.
Assuming low P/E means cheap
The market may be pricing in falling profits. Check revenue trends and cash flow before deciding.
Trusting P/E when earnings are tiny or negative
Near-zero earnings make the P/E huge and meaningless. Negative earnings mean there's no usable P/E at all.
Mixing trailing and forward P/E
Comparing one company's forward P/E with another's trailing P/E gives a misleading picture. Use the same type.
Ignoring one-time items
A big one-off gain or charge can swing EPS for a year and distort the P/E. Look at adjusted or multi-year earnings too.
Work out P/E with Stockwhiz
The "E" in P/E comes from earnings reports. Every earnings release on Stockwhiz shows the reported EPS next to the analyst estimate as soon as it's published.
To get a trailing P/E, add up the last four quarters of EPS and divide the current share price by that total. A beat or miss on earnings day changes the "E", so it can shift the P/E even if the price stays still.
Check yourself
A stock trades at $90 and earned $3.00 per share over the last 12 months. What is its trailing P/E?
Frequently asked questions
There's no single good number. A P/E only means something next to the company's growth rate, its industry peers and its own past P/E range.
The company had zero or negative earnings over the period, so dividing the price by earnings doesn't produce a meaningful number.
Use both. Trailing P/E is based on actual results. Forward P/E shows what analysts expect. A big gap between them tells you earnings are expected to change.
Yes. P/E moves every time the share price moves. A falling price with flat earnings lowers the P/E, and a rising price raises it.
P/E compares price with current earnings. PEG divides the P/E by the expected earnings growth rate, so it accounts for how fast profit is growing.
Related terms
Sources and further reading
This guide was written using the following references. Rules of thumb like the PEG thresholds are common conventions, not official standards.
- U.S. SEC, Investor.gov glossary: Price-earnings ratio
- U.S. SEC, Investor.gov glossary: Price-earnings-growth (PEG) ratio
- Corporate Finance Institute: Trailing P/E ratio
- ATB Wealth: The difference between trailing and forward P/E ratios
- Yahoo Finance: Schwab explains why cheap-looking stocks can be value traps
Stockwhiz Learn is for education only and isn't investment advice. Examples use made-up companies unless marked as live data.